How to calculate: nominal versus real interest rate on expectations

Answer 1

To calculate the nominal interest rate on expectations, you can use the formula:

Nominal interest rate = Real interest rate + Expected inflation rate

For example, if the real interest rate is 3% and the expected inflation rate is 2%, the nominal interest rate on expectations would be 5%.

To calculate the real interest rate, you would use the formula:

Real interest rate = Nominal interest rate - Actual inflation rate

For example, if the nominal interest rate is 6% and the actual inflation rate is 3%, the real interest rate would be 3%.

These calculations can help you understand the relationship between nominal and real interest rates and the impact of inflation on interest rates.